Southland Mayor Gary Tong said the council and central government had worked alongside the Rakiura community for years to investigate sustainable energy options.
''Unfortunately, the latest work has identified that wind generation is not an option at this time,'' Tong said.
Alternative energy generation such as hydro, marine and solar had all been considered previously, but they were assessed as either lacking efficiency or not as economic as wind, Tong said.
''This will be a disappointment to residents as they continue to use electricity created by diesel generators on an island where over 90% of the land mass is national park. It has dark sky sanctuary status and is looking at being predator free by 2025,'' Tong said.
Some funds from the original $3.16 million had been advanced from the provincial development unit arm of the Ministry of Business, Innovation and Employment (MBIE) to enable the Southland District Council to carry out pre-development work.
The remainder of the funding would be returned to central government.